OPEC's Venezuela meeting to test Chavez influence

SAN FRANCISCO (MarketWatch) -- Venezuela, and its stridently nationalist president, Hugo Chavez, will host next week's meeting of the Organization of Petroleum Exporting Countries in what is likely a test of the South American country's ability to influence cartel policy.

The meeting Thursday is OPEC's first since crude-oil prices scaled to record heights above $75 a barrel.

Venezuela has been tightening its hold on its oil operations, forcing oil companies to renegotiate their contracts, and encouraging other countries in the region to nationalize their mining and natural-resources industries.

But Chavez's ability to influence OPEC's policy on production quotas is limited because Venezuela currently isn't meeting its own allotment, and so can't act as a swing producer, analysts say.

That could change, however, if the country is able to tap into its huge potential reserves of heavy oil.

Venezuela's conventional oil reserves are pegged at around 80 billion barrels, but the country believes it has some 235 billion barrels of recoverable deposits in the Orinoco Belt, according to Sean Brodrick, an editor at Weiss Research.

"Venezuela needs the Orinoco Belt tar sands reclassified, and it needs strategic partners to help it develop those deposits and bring them to market," said Brodrick.

If Venezuela can reclassify its heavy-crude deposits, the country's proved crude-oil reserves may even surpass those of Saudi Arabia, which according to OPEC data currently holds the world's largest proved reserves of crude, 264.3 million barrels.

But Venezuela's inability to meet even its current OPEC quota "weakens its standing in the cartel," said Brodrick. "It doesn't have any extra production, so of course it's always on the side of cutting production."

The front-month contract for crude futures rose to an intraday high of $75.40 on April 24 and remains at around $70.

OPEC's basket price, which tracks the performance of 11 types of crude oil, stood at $63.91 on May 25. Its yearly average price for 2005 was $50.64.

With prices at lofty levels and U.S. crude supplies near an eight-year high, analysts have said Thursday's OPEC meeting is unlikely to result in a change to the group's production quota, which has remained at 28 million barrels a day since July 1.

Even so, Venezuela has been pushing OPEC to reduce its output, which could well bring prices back to the all-time high of late April.

It's really not an unusual move on Venezuela's part, since it wants to maximize its oil revenue, analysts said.

"They say that at every meeting," said Brodrick. "They want higher prices. They think they're selling oil on the cheap."

Taking control

Latin American countries have been eyeing the oil industry's rising revenue - and deciding that more of those riches should stay at home. See full story.

Venezuela may use its position as host Thursday to "trumpet resource nationalism," said Michael Lynch, president of Strategic Energy & Economic Research.

For its part, Venezuela seeks a 60% controlling stake in four heavy-oil projects in the Orinoco River basin, according to published reports.

The Orinoco basin, southeast of Caracas, along the Orinoco River, holds some of the world's largest untapped oil reserves, according to Venezuela. And the country has already taken as much as 80% control of other oil fields across the country that had been run by private companies under contract, according to the Associated Press.

OPEC countries will likely take an " 'After you, Alphonse' response," to both Venezuela's calls for resource nationalism and lower quotas, Lynch said. He expects Iran will probably offer moral support, he said.

"The recent tax policies and changes to operating agreements with foreign oil companies have made these companies wary of investing additional funds in Venezuela," said James Williams, an economist at WTRG Economics.

And thus far, "Venezuela has not invested sufficient capital to increase its production," he said, noting that output is more than 500,000 barrels a day short of meeting the OPEC quota. "Having reserves on paper is entirely different than being able to produce oil from those reserves," he said.

Among the things Venezuela and Iran have in common, both "hate" the U.S., subsidize domestic gas prices to keep their citizens happy, and depend heavily on rising oil prices, he said, calling the alliance between the regimes a "powerful Axis of Oil."

Together, they produce about 7 million barrels of oil a day, about 8% of the world's total output and 23% of the total OPEC pumped in April, according to Weiss Research's Brodrick.

"Working together, they can shake the market. Heck, they can shake the world," he said in a recent article on MoneyandMarkets.com. Read the full article.

Powerless for now

Then again, Venezuela won't be able to advance its position in OPEC until oil from its untapped reserves can be produced economically.

In a monthly report released in mid-May, OPEC forecast 2006 world oil-demand would grow 1.4 million barrels a day to a total 84.6 million -- down 60,000 barrels a day from its previous estimate, as high prices helped damp demand, mainly in developed countries. See related story.

"One way to help the global economy would be to lower oil prices by increasing quotas," said Brodrick.

Saudi Arabia is the only swing OPEC producer right now, with the Energy Department estimating its spare output capacity at 900,000 to 1.4 million barrels. WTRG's Williams pegs its spare capacity at the low end of that range.

"Saudi Arabia, Kuwait, [the United Arab Emirates and] Qatar would not be upset to see oil prices fall to the $50-to-$60-per-barrel range, and would raise capacity -- if they could -- to bring oil prices down," said Bernard Picchi, senior managing director at Foresight Research Solutions.

So if Venezuela wants a production cut and Saudi Arabia decides to support an increase, it's possible that "the Saudis and Venezuelans will be at loggerheads at the meeting," said Brodrick.

In the end, "OPEC will want to appear to be driving down prices by leaving quotas unchanged or even raising them, while responding to weaker demand by letting production drift down slightly," said SEER's Lynch.

Lowering production quotas -- as Venezuela wants -- when prices are above $70 "would provoke a firestorm of protest," he said.

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